Research

Building a Capital Roadmap: The Challenges and Benefits of Creating and Optimizing a Funding Model for Each Stage of a Lender’s Growth

This paper is an introduction to funding models and funding strategies. To be competitive and build sustainable lending businesses, organizations—particularly non-bank lenders—need reliable access to diverse, flexible, and low-cost sources of funds. This requires the active management of capital raising efforts, a near constant search for funding sources, and eventually the ability to optimize the use of those
funds. What is needed is a guide to building and managing a diversified funding model designed to support an organization through each phase of growth, and to be resilient in a shifting macroeconomic environment over successive credit cycles. Lenders also need advanced tools that support careful monitoring of how funds are used, including agreement covenants, concentration limits, and performance, while improving their ability to use capital most effectively and remain focused on continually driving down their cost of funds. Building and properly executing a Capital Roadmap can provide an advantage in this highly competitive industry.

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Over the past decade, online lending has grown from a cottage industry of start ups and enthusiasts to an important component of the emerging financial technology (fintech) landscape. It has become an industry worth tens of billions of dollars, with sophisticated institutional asset managers, publicly-traded companies, and the potential to comprise a significant share of global consumer and business lending in the coming years. As the industry focuses on growth and developing a mature, sustainable ecosystem, there are many hurdles still to overcome.

In our latest paper, we address the issue of non-standard data by first explaining what standardization means as it relates to online lending. Next, we describe Orchard’s process and the technology used to create a standardized dataset that promotes analysis, benchmarking, and reporting for investors and originators alike. We then illustrate the difficulties faced when attempting to compare data across different origination platforms by walking through examples of a few specific issues encountered when standardizing loan payment data with Orchard’s data partners. Finally, we discuss some of the benefits and uses of our standardized dataset.

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Stress Testing: Marketplace Lending in a Rapidly Changing Environment

In an era of Federal Reserve near-zero interest rate policy and with bond markets near historically low yields, marketplace lending has emerged as a new asset class with attractive returns and low volatility. Over the last five years, we’ve seen strong and consistent returns from portfolios of marketplace loans. The Orchard Consumer Marketplace Lending Index presents a compelling picture of the potential returns of this new asset class, with 2015 returns that have clearly outperformed stalwarts such as the S&P 500 and the Barclays Aggregate Bond Index. While falling unemployment rates and strong domestic growth have provided the ideal opportunity for this new asset class to flourish, we know that these favorable conditions cannot last forever.

The question that seems to be on everyone’s mind is, what happens then? How might higher unemployment levels, falling home prices, and credit deterioration affect the returns of loan portfolios originated under the marketplace model? How much stress would be needed to realize negative returns? What can we expect? In this paper, we will define a framework for stress testing, simulate a range of outcomes, and provide expectations and guidance on the expected returns of marketplace loans through a series of stressors.

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The Essential Eight Best Practices in Marketplace Lending

Orchard Platform’s first white paper, The Essential Eight Best Practices to Marketplace Lending Investing: Key Considerations for Institutional Investors & Investment Managers. The purpose of this paper is to highlight the challenges that institutional investors and investment managers face investing in marketplace lending and offer a set of best practices to assist both groups in successfully investing in this new asset class. To provide the greatest possible benefit to both institutional investors and managers, this paper will:

Highlight the 10 main challenges that institutional investors and investment managers experience investing in marketplace lending

Present a list of 8 essential best practices that can help investors and managers

Offer a detailed sub-checklist within each best practice

Provide an aggregated checklist of 25 overall considerations for both investors and managers in following the essential eight best practices